CRPC PRACTICE EXAM 2WITH QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALE |ALREADY GRADED A+
Which of the following are correct statements about the capital utilization strategy? -
(ANSWER)I. It produces an annual retirement income over a finite number of years.
II. Assuming the yield remains the same, the larger the retirement income that is paid, the
shorter the number of years over which it will be paid.
III. When the capital utilization approach is used, the planner must be careful in making
assumptions about the life expectancy of the client.
IV. The effect of taxes on retirement savings and distributions should be considered when
the before-tax approach is used to calculate the future value of retirement assets.
#$
Which one of the following is not a key element of an investment policy? - (ANSWER)A) a %
provision for periodic review ^
B) the acceptable risk tolerance level &*
C) a target asset allocation ()_
D) names of specific stocks to be in the portfolio +
--D
The key elements in an investment policy are a clear statement of the client's goal, suitable
investment vehicles and strategies, the acceptable risk tolerance level for the client, asset
allocation guidelines, and a provision for periodic review. One way to remember the
essential elements of an investment policy is the acronym "GRASP" (Goals, Risk, Asset
Allocation, Strategies/Suitable Investment-meaning the investment categories that may or
may not be used-and Periodic Review). Specific investments would be determined after the
investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities
(TIPS)? - (ANSWER)A) They are sold at a discount.
B) The increase in principal is taxable each year.
C) Their returns are tied to the producer price index.
D) They are issued with maturities up to 40 years.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is
the expected change in price for this fund? - (ANSWER)A) 6.5% decrease
B) 9.75% increase
C) 9.75% decrease
D) 6.5% increase
--C
1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent
the inverse relationship between bond prices and interest rates. In this case, an increase in
rates means the bonds or bond funds will fall in price. Therefore, this fund will decrease in
,CRPC PRACTICE EXAM 2WITH QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALE |ALREADY GRADED A+
price about 9.75%. Also, you can remember that bond prices move opposite to interest
rates. An increase in interest rates means the price of bonds will go down.
The process of rebalancing is a key factor in - (ANSWER)Strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long
period. For example, this might be 60% stocks and 40% bonds. When these percentages
change due to market movements, this strategic asset allocation requires the portfolio to
be rebalanced back to the target mix, in this case 60/40 stocks/bonds. #$
%
What does Jensen's alpha tell you? - (ANSWER)the percentage a manager over- or ^
underperformed based on the amount of risk taken &*
()_
The percentage of return that can be attributed to systematic risk is referred to as the - +
(ANSWER)coefficient of determination (R2).
Which of the following are not used in technical analysis? - (ANSWER)A) graphs
B) financial statement ratios
C) moving averages
D) supply and demand of stocks
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
used by technicians.
Financial statement ratios are part of fundamental analysis.
When performing bond calculations, which of the following general assumptions should be
made unless stated otherwise? - (ANSWER)A) The coupon rate is annualized but paid
semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the Begin mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is $10,000.
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon rate
is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds and the
, CRPC PRACTICE EXAM 2WITH QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALE |ALREADY GRADED A+
coupon payment is always made at the end of the period, not the beginning. All bonds,
even zero coupon bonds, are compounded semiannually in the End mode. This makes all
bond YTM quotes standardized for easy comparison.
Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity.
Comparable bonds are yielding 6%. What is the value of this bond? - (ANSWER)A) $1,010
B) $902
C) $925
D) $875 #$
--B %
If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for ^
semiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N], then &*
solve for [PV] = -902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is entered as ()_
15 [SHIFT] [N]. +
Which of the following is correct regarding the additional payroll tax for high wage earners
that was brought about by the Affordable Care Act? - (ANSWER)A) The tax applies to those
with an AGI in excess of $500,000.
B) The tax is 1.9%.
C) The tax is split between the employer and employee.
D) The tax was designed to provide additional funding for Medicare.
--D
This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to high
earners only (AGI in excess of $250,000 for joint filers and $200,000 for single filers, not
indexed).
Mark, a financial adviser, has a client who has worked in two positions during his lifetime.
The client's first position was a state or local government position that was not covered by
Social Security. The client is receiving a pension from that employment. His second
position was covered by Social Security and he is eligible for Social Security retirement
benefits. Mark should advise his client that - (ANSWER)his eligibility for Social Security
retirement benefits may be reduced due to the windfall elimination provision (WEP).
Worked in a position that was not covered by Social Security, and the client is receiving a
pension from that employment, - (ANSWER)If you have a client who has worked in a
position that was not covered by Social Security, and the client is receiving a pension from
that employment, his eligibility for Social Security benefits based on his own work history
covered by Social Security may be reduced due to the windfall elimination provision (WEP).
ANSWERS WITH RATIONALE |ALREADY GRADED A+
Which of the following are correct statements about the capital utilization strategy? -
(ANSWER)I. It produces an annual retirement income over a finite number of years.
II. Assuming the yield remains the same, the larger the retirement income that is paid, the
shorter the number of years over which it will be paid.
III. When the capital utilization approach is used, the planner must be careful in making
assumptions about the life expectancy of the client.
IV. The effect of taxes on retirement savings and distributions should be considered when
the before-tax approach is used to calculate the future value of retirement assets.
#$
Which one of the following is not a key element of an investment policy? - (ANSWER)A) a %
provision for periodic review ^
B) the acceptable risk tolerance level &*
C) a target asset allocation ()_
D) names of specific stocks to be in the portfolio +
--D
The key elements in an investment policy are a clear statement of the client's goal, suitable
investment vehicles and strategies, the acceptable risk tolerance level for the client, asset
allocation guidelines, and a provision for periodic review. One way to remember the
essential elements of an investment policy is the acronym "GRASP" (Goals, Risk, Asset
Allocation, Strategies/Suitable Investment-meaning the investment categories that may or
may not be used-and Periodic Review). Specific investments would be determined after the
investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities
(TIPS)? - (ANSWER)A) They are sold at a discount.
B) The increase in principal is taxable each year.
C) Their returns are tied to the producer price index.
D) They are issued with maturities up to 40 years.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is
the expected change in price for this fund? - (ANSWER)A) 6.5% decrease
B) 9.75% increase
C) 9.75% decrease
D) 6.5% increase
--C
1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent
the inverse relationship between bond prices and interest rates. In this case, an increase in
rates means the bonds or bond funds will fall in price. Therefore, this fund will decrease in
,CRPC PRACTICE EXAM 2WITH QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALE |ALREADY GRADED A+
price about 9.75%. Also, you can remember that bond prices move opposite to interest
rates. An increase in interest rates means the price of bonds will go down.
The process of rebalancing is a key factor in - (ANSWER)Strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long
period. For example, this might be 60% stocks and 40% bonds. When these percentages
change due to market movements, this strategic asset allocation requires the portfolio to
be rebalanced back to the target mix, in this case 60/40 stocks/bonds. #$
%
What does Jensen's alpha tell you? - (ANSWER)the percentage a manager over- or ^
underperformed based on the amount of risk taken &*
()_
The percentage of return that can be attributed to systematic risk is referred to as the - +
(ANSWER)coefficient of determination (R2).
Which of the following are not used in technical analysis? - (ANSWER)A) graphs
B) financial statement ratios
C) moving averages
D) supply and demand of stocks
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
used by technicians.
Financial statement ratios are part of fundamental analysis.
When performing bond calculations, which of the following general assumptions should be
made unless stated otherwise? - (ANSWER)A) The coupon rate is annualized but paid
semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the Begin mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is $10,000.
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon rate
is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds and the
, CRPC PRACTICE EXAM 2WITH QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALE |ALREADY GRADED A+
coupon payment is always made at the end of the period, not the beginning. All bonds,
even zero coupon bonds, are compounded semiannually in the End mode. This makes all
bond YTM quotes standardized for easy comparison.
Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity.
Comparable bonds are yielding 6%. What is the value of this bond? - (ANSWER)A) $1,010
B) $902
C) $925
D) $875 #$
--B %
If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for ^
semiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N], then &*
solve for [PV] = -902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is entered as ()_
15 [SHIFT] [N]. +
Which of the following is correct regarding the additional payroll tax for high wage earners
that was brought about by the Affordable Care Act? - (ANSWER)A) The tax applies to those
with an AGI in excess of $500,000.
B) The tax is 1.9%.
C) The tax is split between the employer and employee.
D) The tax was designed to provide additional funding for Medicare.
--D
This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to high
earners only (AGI in excess of $250,000 for joint filers and $200,000 for single filers, not
indexed).
Mark, a financial adviser, has a client who has worked in two positions during his lifetime.
The client's first position was a state or local government position that was not covered by
Social Security. The client is receiving a pension from that employment. His second
position was covered by Social Security and he is eligible for Social Security retirement
benefits. Mark should advise his client that - (ANSWER)his eligibility for Social Security
retirement benefits may be reduced due to the windfall elimination provision (WEP).
Worked in a position that was not covered by Social Security, and the client is receiving a
pension from that employment, - (ANSWER)If you have a client who has worked in a
position that was not covered by Social Security, and the client is receiving a pension from
that employment, his eligibility for Social Security benefits based on his own work history
covered by Social Security may be reduced due to the windfall elimination provision (WEP).
